For the past quarter of a century, multinational pharmaceutical companies have shown limited interest in India. Protectionist policies introduced by the Indian government in 1970 hit profits hard, and companies have been further deterred by the lack of intellectual property rights. As a result, MNCs have just 30 percent of India’s pharmaceutical market, compared with 80 percent 25 years ago (Exhibit 1 and Exhibit 2). Yet the climate is changing. As part of government efforts to liberalize the economy, regulations governing the industry are being abolished or simplified, and price levels are rising. At the same time, increased personal spending, fuelled by economic growth and greater access to medical care, is helping to expand the market.

These changes make it an appropriate time for multinationals to reconsider India. Opportunities exist not only to expand market share rapidly in the country itself, but also to use it as a base for sourcing bulk actives and intermediates,¹ for sourcing formulations for export to other developing nations, and for research and development. Together, these four areas of opportunity could represent from $300 million to $800 million of net present value to a leading multinational. To capture this value, however, MNCs will have to consider fundamental strategic and operational changes, which in turn will require them to rethink traditional management policies and practices.

A change of climate

The regulatory changes initiated in 1970 were aimed at establishing a thriving domestic pharmaceuticals industry driven by low costs and pirated or generic products. Drug prices were set at levels that were sometimes no more than 4 percent of developed market prices (resulting in a market ranked sixth in volume terms, but about fourteenth in market value), import tariffs were high (above 200 percent in the 1970s) in order to encourage domestic manufacturing and prevent the outflow of foreign exchange, and foreign direct investment in any business was limited to 40 percent, curbing MNCs’ earnings from Indian operations. Patent laws protected processes only—product patents were open to reverse engineering.

These restrictions had various effects on MNCs’ activities. Some stopped selling products that were priced too low, while others continued to compete but created new local brands to prevent their international brands being exported from India and sold cheaply elsewhere. Ceilings on foreign equity led to creative methods of redirecting or securing earnings: some subsidiaries entered into royalty-bearing licensing agreements with their parent companies; some parent companies charged inflated prices for raw materials. In addition, Indian subsidiaries were discouraged from exporting; export markets were more profitably served by an MNC’s 100-percent-owned operations.

Multinationals often limited their portfolios to patent-expired products, but local competitors went ahead and introduced the most advanced medicines

The absence of patent protection led many multinationals to limit their portfolios to patent-expired products or a few selected patented products—a move that further eroded their market share as local competitors went ahead and introduced the most advanced medicines through reverse engineering. Additionally, for medical, legal, or economic reasons, most were unwilling to introduce products not already on their international product list simply to cater for the Indian market, limiting their participation in the Indian-branded generic market. Finally, MNCs were generally unwilling to introduce products that infringed other companies’ non-Indian patents (despite local company practices and the regulatory freedom to do so). Again, they lost market share.

From an MNC’s point of view, the environment has now changed for the better. Price controls cover only 76 bulk drugs, accounting for about half of drug sales, and the industry is lobbying for gradual but complete decontrol of prices by 2000. Some observers estimate that, at worst, price controls will apply to only 30 percent of drugs by then. Import tariffs have been reduced to 42 percent on bulk drugs and intermediates and further reductions are likely. The limits on foreign direct investment have also been lifted, allowing MNCs full ownership of Indian subsidiaries. Some (including Bristol Myers Squibb, Hoffman LaRoche and SmithKline Beecham) are forming, or have formed, wholly-owned subsidiaries.

Meanwhile, India has signed GATT, and will have to conform to worldwide patent standards by 2005. During the phase-in period, it will have to provide MNCs with exclusive marketing rights and a "mailbox" provision that allows them to file patent applications now for consideration once patent protection comes into force. The government has said it will pass legislation that recognizes intellectual property rights in the current parliamentary session.

Besides benefiting from a more liberal market, MNCs can also expect the market to grow. In 1995, the year price controls were eased, it expanded at a nominal rate of 14 percent, while real volume growth was about 9 percent. Since the lifting of price controls, however, the nominal market growth rate has increased to 19 percent, and prices are rising by about 7 percent a year. Volume growth has accelerated further to about 12 percent.

These trends are likely to continue. Prices will rise further, although the government will be reluctant to let them soar. Volumes will increase as healthcare spending rises and healthcare coverage grows from the current 35 percent. These factors combined could see the market expand from about $2.5 billion today to $6 billion by 2001, assuming current exchange rates (Exhibit 3). Still higher growth is possible depending on the rate of price decontrol, healthcare penetration, economic growth, and the phase-in of healthcare insurance as well as new products such as cancer drugs.

New opportunities

Multinational pharmaceutical companies have four opportunities in India.

1. The domestic market

Companies that tap India’a latent demand for pharmaceuticals can expect to expand market share rapidly. To do so, they will have to make strategic and operational changes.

Strategic considerations. A mix of government regulations, poor patent protection, and product portfolio decisions has led MNCs to rely on just a few products for most of their revenues in India, with a consequent loss of marketing advantage. Although MNCs are recognized for their quality and brand image, physicians regard Indian companies such as Cipla and Sun as having better therapeutic expertise and a broader range of products within therapeutic areas. Indian manufacturers therefore take a greater share of revenue from these areas.

To increase their Indian market share, multinationals should first consider tailoring their products to local conditions—by offering different dosages for Indian patients or formulations better suited to the climate—and introducing drugs that are particularly needed, such as antimalarials. Second, they should consider the selective introduction of off-patent generics that complement and extend their therapeutic area offerings. Third, companies with more specialized product portfolios should supplement their niche therapeutic areas with off-patent generics.

An alternative approach would be to consider acquiring a local competitor.² The MNC would probably see an immediate rise in market share (some Indian pharmaceutical companies are trading at low price/earnings ratios—in certain cases less than 5), and gain the advantages of the Indian competitor’s business system, including process-engineering skills, cheaper manufacturing, an experienced salesforce, broad generic product lines, local reputation, and export distribution channels in some international markets.

Operational considerations. Multinationals can also enhance their market position by improving the efficiency of their supply chain and the performance of their salesforce.

Supply chain. The Indian operations of most multinationals tend to have unreliable supply chains. Planning, for example, is often poorly coordinated among purchasing, manufacturing, and sales functions. Purchasing may fail to obtain timely delivery of key raw materials (often because of late notification of need), while manufacturing may run into unforeseen technical problems, or encounter delays in batch sample delivery to the quality control laboratory. In addition, because some multinationals in India contract out their manufacturing, schedules are delayed because the contractor has other commitments. Both central and regional distributors may fail to detect low inventories or to dispatch stock in a timely manner.

The upshot of all these problems is often lost sales; Indian pharmacists report that up to half of prescription substitutions are made because the prescribed product is unavailable. It means high working capital levels as companies attempt to prevent medicines going out of stock by maintaining excessive product and raw material inventories.

Three alterations are needed to make the supply chain more efficient. First, planning should be centralized to allow more rapid response to changes in requirements. Second, MNCs need to gather better information by tracking stock levels at local wholesalers, regional distributors, and the central warehouse, using IT solutions for daily reporting where possible. Third, MNCs can raise contract manufacturers’ performance by installing on-site technical and quality controls.

Salesforce. Indian pharmaceutical retailers are influential because they have to recommend substitutes for prescribed products that are out of stock, and often fail to adhere to prescriptions even when the prescribed product is in stock. So it is critical for multinationals to detail both doctors and retailers (there are almost half a million of each). They also need to be able to tap latent demand in remoter regions, as 70 percent of India’s population is rural.

To meet these challenges, local companies have already enlarged their salesforces, although most MNCs have yet to act. Low labor costs mean there is little financial risk in employing more sales people as long as they are well-qualified and well-managed. MNCs should ensure they are deployed by the beginning of the sales cycle, provide upfront training, and evaluate performance early to identify problems areas and provide coaching. But before they hire new people, multinationals need to make their existing sales organizations more productive by ensuring that they focus on markets with the most potential, that detailing is based on customer needs, and that scheduling routes take into account how difficult some customers are to reach. Well-designed and well-managed incentive schemes will improve performance, as will co-marketing, mail-based detailing, and the outsourcing of remoter areas to local commission agents.

2. The sourcing of bulk actives and intermediates

Salaries, infrastructure costs, and equipment costs are low, encouraged by competition in the domestic industry and government price controls

India is an attractive base from which to source bulk actives and intermediates. The bulk industry has more than 800 local manufacturers, many of whom have developed world-class skills in chemical synthesis and process engineering in the course of copying patented products launched in developed markets. Salaries, infrastructure costs, and equipment costs are low, encouraged by competition in the domestic industry and government price controls. Consequently, bulk actives—even for mature, off-patent products—cost only half or a third as much as they do in the US.

Indian companies are already taking advantage of these strengths. Exports of bulk actives and intermediates have risen by about 15 percent a year over the past three years, and currently stand at $380 million. They are forecast to reach more than $800 million by the end of the decade. And although most exports have been in low value-added product categories, some leading companies such as Ranbaxy, DRL, and Lupin have penetrated the high value-added US market. Several have FDA-approved good manufacturing practices (GMP) facilities. Ranbaxy is currently selling antibiotics in the US and has tied up with Eli Lilly to market generics there. DRL is among the leading manufacturers globally of ibuprofen and currently sells to the US. Both DRL and Lupin have recently tied up with PRI in the US to gain access to regulatory and marketing capabilities for selling bulk actives and, ultimately, generics there.

Multinationals could also take advantage of India’s low costs and strong process-engineering and manufacturing capabilities by outsourcing the production of bulk actives or intermediates to Indian companies. (Today, total global bulk actives consumption is estimated to be about $25 billion, $10 billion to $15 billion of which is produced by multinational companies internally.) Initially, the most suitable products for outsourcing are likely to be mature intermediates that are under cost pressure (and so less risky to outsource), or specialized intermediates required for products under development. Process-development skills, GMP systems, manufacturing facilities, local market position, and quality of management team are all key criteria in selecting local suppliers. As MNCs develop confidence in Indian suppliers they should be able to outsource more products, including finished actives, and develop deeper relationships with them. Some multinationals have already formed outsourcing alliances with leading Indian bulk actives manufacturers.

3. The sourcing of formulations for export to developing nations

Multinationals currently supply a number of fast-growing, developing markets by importing formulations. Governments of the larger developing markets are likely to limit imports to encourage local production, however, leaving only smaller markets that are unable to sustain full-scale MNC manufacturing operations. Using India as a base, MNCs could export generic products sourced from Indian companies and their own, locally manufactured patented products to these smaller markets.

An Indian pharmaceutical company’s costs are about 45 percent lower than those of a generics manufacturer in a developed country, and 75 percent lower than those of an R&D-based multinational (Exhibit 4). Much of the differential stems from lower labor expenses (which are about 80 percent less), and infrastructure costs (about 40 percent less). Manufacturing costs can be further reduced by purchasing raw materials from India or China at a 10 to 30 percent cost saving. Even with shipping costs, import duties, and local trade margins, India’s cost structure is likely to mean a hefty margin on formulation exports sourced there—a particularly appealing prospect in low-price markets (Exhibit 5). Leading Indian companies already enjoy export margins 50 to 100 percent higher than domestic market margins.³

4. Research and development

India’s research and development facilities represent the fourth area of opportunity for MNCs.

Multinationals question the quality of the country’s infrastructure, the expertise of its scientists, and its ability to maintain confidentiality

Research. Experience has led multinationals to cast a jaundiced eye over India’s basic research facilities. They question the quality of the country’s infrastructure, the expertise of its scientists, and its ability to maintain confidentiality. These issues stem from the historical dependence of Indian research institutes on inadequate government funding, the bureaucratic organization and leadership of its scientific institutions, the lack of significant links between industry and academia, and the absence of intellectual property protection.

But again, circumstances are changing. Funding has shifted to a mix of public and private provision, while new government regulations will encourage patent protection and collaboration with industry. The government has targeted biotechnology, microbiology, and human genetics in particular for further investment, leading to the establishment of new biological science programs at a number of institutions. Leaders of scientific organizations are setting higher research standards, and are keen to collaborate with industry. They are also fast learning the need to maintain confidentiality if they are to attract partners.

In the light of these changes, India’s strengths in R&D—its rich scientific base and low costs—are more apparent. It has the second-largest English-speaking scientific base in the world, with more than 200 universities and 2,000 research institutes, including up to ten leading biology/chemistry institutes.⁴ Some (including NCL, IICT, CDRI, and IMTECH) have capabilities in organic chemical synthesis and natural-products screening. CDRI and IMTECH, along with IISc and CCMB, are developing skills in new research areas such as rational drug design, genomics, development of new animal models, and high throughput screening. IISc, for example, is seeking new targets based on gene identification, cloning, and expression; IISc reports that its scientists are training in combinatorial chemistry; and IICT has launched a cluster of "discovery labs" to find new molecules in anticipation of the new intellectual property regime.

Several institutions have reported early success in clinical trials of drugs for the treatment of breast cancer, malaria, filariasis, helminthic disease, inflammation, and allergies. Clinical trials are also being conducted of vaccines against leprosy and as a contraceptive.

Since India accepted GATT, leading domestic companies have been working with Indian scientists to discover new drugs, although their total research budget is 5 percent of sales at most. DRL has a research foundation of 70 scientists that has filed for US patents and is conducting clinical trials on four compounds, including an anti-diabetic and three anti-cancer drugs; Cipla has started marketing an indigenously developed drug, deferiprone, for β-thalassemia.

On the costs front, a skilled PhD can be employed for 20 percent of the prevailing US rate. Given the number of new graduate chemists and biologists entering the workforce each year, supply is likely to far exceed demand and wage equilibrium is at least ten years away.⁵ Physical infrastructure and overhead costs, depending on location, are 40 to 60 percent of US rates—although equipment and supply expenses are on a par. Nonetheless, CDRI estimates that it could develop a drug from scratch for about 30 percent of US costs.

Multinationals wanting to take advantage of the country’s scientific expertise and low costs to conduct research should initially focus, as several MNCs already do, on its strong organic synthesis and natural-products capabilities. They might also collaborate in research into molecules or vaccines targeted at infectious diseases, an area on which Indian centers focus. Given the research expertise, MNCs could probably contract out projects in these areas.

Multinationals should also pay more attention to how particular Indian centers—CCMB, for instance—could assist them in supporting new research activities such as combinatorial chemistry and high throughput screening. (The limited Indian accomplishment in these areas could mean a closer, more collaborative working arrangement would be needed, and perhaps some technology transfer.)

In both cases MNCs should consider four success factors: they must define the disease, molecule, or target objectives; agree on the process, underlying milestones, and time periods; ensure necessary skills will be available; and remain in close contact to ensure linkage to the MNC.

Development. India is an attractive site for preclinical and clinical development activities. The lack of patent regulation that has driven domestic companies to reverse engineer patented products in order to introduce them into the local market means they have engaged in preclinical development activities such as stability testing, bioequivalence studies, excipient selection, and process scale-up.

Research institutions such as CDRI have also conducted extensive preclinical research into pharmacokinetics, drug metabolism, and toxicology. The cost and time restrictions under which both they and commercial companies operate means they have developed almost world-class skills, as well as having low costs—advantages that multinationals can use to conduct preclinical development activities in India not only for generics, but also for new molecules.

The availability of a vast pool of often untreated patients and rapid enrolment rates makes the country an attractive clinical research location

Similarly, India could be a competitive source of clinical research for use in international drug dossiers. There are three reasons for this. First, there is a vast pool of patients for most indications, which means faster enrolment rates; patient enrolment rates for a phase III study can be up to six times higher in India than the US. Second, India’s low costs—even after accounting for additional investments required to meet good clinical practices (GCP) standards—and clinical research skills can result in a cost advantage of up to 85 percent. Finally, the prevalence of certain diseases—notably malaria and hepatitis—makes the country an attractive clinical research location for such indications.

One obstacle is whether clinical data are acceptable to regulatory authorities in the US and Europe: India has to establish a reputation for excellence so that data generated there is generally accepted. Another is the time it can take—up to two years—for a clinical site to gain regulatory approval or establish GCP quality. Other obstacles include a government ban on concurrent phase trials (only trials with one phase lag are allowed), and a lack of GCP-trained biostatisticians. Nonetheless, there are signs that the government will soon allow concurrent trials (they are already happening informally), while biostatistical skills could be brought up to standard within two years given MNCs’ assistance.

Multinationals can exploit development opportunities in three ways. First, they can encourage in-house, broad-based clinical development skills in conjunction with a reputable clinical facility; the facility should have leading physicians capable of serving as investigators on studies, and be committed to developing GCP through investment and policy or procedural changes. For its part, the MNC would need to provide carefully selected staff with experience in GCP trials, intensive training for local clinical research assistants, clear documentation of standard operating procedures and guidelines, and continuous monitoring.

Second, MNCs could choose to establish limited operations, such as clinical data-management centers, to take advantage of low costs and faster turnaround times without performing actual clinical trials. A third possibility is for MNCs to forge links with leading western clinical research organizations that are expanding into Asia. Such an arrangement would enable multinationals to reap the benefits of clinical development without taking on extra overheads or logistical responsibilities.

Capturing value

How much are these four opportunities worth to a leading multinational?⁶ Much depends upon how aggressively each one is pursued. By increasing domestic market share by 2 to 5 percent, for example, a company could generate $120 million to $300 million in net present value. Similarly, the bulk actives market offers the potential to create $85 million to $260 million in value, depending on the MNC’s current bulk actives costs and how much it outsources. Exporting formulations from India to developing nations could yield another $40 million to $70 million, while the value of pursuing R&D in India could range from $45 million to $135 million.

Yet tapping into this value will not be easy. Many multinationals have to resolve management issues first (Exhibit 6). To take a greater share of the domestic market, they might have to grant Indian subsidiaries more strategic and operational freedom than they are generally comfortable with and allow them to introduce generic products, source inputs from the most competitive suppliers, redesign the supply chain, or expand the salesforce.

An MNC will also have to decide whether it is willing to expand its operations in India while patent regulations are still evolving, and whether it will allow a flexible pricing system coupled with local trade names that permit more aggressive local price competition while protecting against gray market exports. Finally, MNCs should use country managers who are culturally sensitive, attuned to local business practices, and comfortable in the local social fabric; this can increase effectiveness in extracting performance from local operations.⁷

To realize the opportunity bulk actives represent, MNCs need to consider whether they are willing to trust and test Indian manufacturers or, alternatively, make long-term investments in local manufacturing facilities and research bases. They also need to understand the impact of their relationships with Indian suppliers on their own existing bulk actives manufacturing facilities and sourcing contracts. Building a self-sustaining, competitive, independent operation may mean granting it the freedom to sell actives and intermediates abroad to companies other than the MNC or its affiliates.

Sourcing generics for developing markets requires MNCs to understand whether the market is large enough to warrant the effort. In addition, they must ensure that product quality standards can be adhered to and that developing markets can be served reliably from India. Further, the MNC will need to decide what role and degree of control its Indian operation will have with respect to formulations sourcing.

With regard to R&D, an MNC will need to assess the extent to which Indian R&D capabilities are relevant to its specific research activities and the size of investment and degree of technology transfer it is comfortable with. It will need to reach specific decisions regarding who to partner with, the structure of the relationship, the level of control, and the degree of interaction required to achieve success.

Indian market growth is so strong that multinational pharmaceutical companies operating there will benefit whether or not they modify their Indian businesses. But a few fundamental changes to their strategic, operational, and management policies could greatly increase the prize. Such adjustments may not come easily to those accustomed to doing business in the developed world—MNCs will need to be more adaptable and flexible than they are used to being, and willing to work with local players using local assets—but their rewards could extend well beyond the local market to greater growth around the world.